We report every year on an annual study carried out by researchers Bulwiengesa on where to find a 5% yield (or better) in German real estate. As this year's edition (the eighth) of the study shows, in the prevailing climate it's become even more difficult to nail down yields of that order, without taking on sizeable risk.
Still, it's not impossible to still find assets that meet the 5% criterion. Diligent research will still throw up candidates such as offices in the so-called D-cities, corporate properties, business parks and some shopping centres. Non-core assets, such as production properties, could even return 6% or more, says the survey.
Sven Carstensen, board member at Bulwiengesa, says in the foreward to this year's study, reminds us that the times of almost unlimited capital availability are over, with value drivers being increasingly the asset's location and the quality of the property for its purpose, and less the dynamics of yield compression.
Office markets are delivering more attractive yields, with the value in so-called A-markets increasing by 50 bps to 2.68% compared to last year, with the core range extending from 0.7% to 3.3%. B-markets are ranging from 1.3% to 3.8%.
Heavy demands on energy efficiency and other capex measures have kept these yields down, with only assets in D-markets showing an achievable IRR of 5% or more. "The current investment environment is characterised by strong restraint, so it cannot be ruled out that the rise in yields will continue," the study states.
For logistics properties, initial yields have fallen significantly since the previous year's study (data from 30.6.2021), but have been rising again since spring 2022. Due to the low transaction volume, the level of the increase can only be estimated, according to Bulwiengesa. However, with demand remaining high, tenant expectations are stable. The decline in the achievable IRR is continuing, albeit at a slower pace. The base value in the current Bulwiengesa study is 3.57 %, with a range of 2.9% to 4.3% percent in the core sector. Like offices, logistics properties also have to fulfil sustainability criteria and price in corresponding capex expenses.
On residential housing, the study points to the ongoing housing shortage and the lack of new building, along with plentiful new regulation for energy-efficiency renovations and upgrades. The new higher interest rates are impacting on initial yields; for core properties, 2.3% is currently achievable, although the range has widened to 1.6% to 2.8% percent. In lower-yielding markets, energy-efficiency measures in the portfolio have a stronger impact on cash flow, the study states - with correspondingly lower yield expectations. Positive rental development expectations support the yield level. "Rising inflation can - depending on the contract design - be partially passed on to the tenants," say the authors.
For the first time, the asset class of serviced housing was included in the study. Much depends here on the performance of the operator, and the type of contract with that operator, but with demand for investing in the sector rising strongly in recent years, yields have dropped. Here, 3.42% is an achievable IRR.
For the troubled retail sector, purchase yields have remained stable, with the IRR's for retail space rising, benefitting from contracts which are generally index-linked. But lots of questions abound surrounding the sector's sustainability of returns. Bulwiengesa says the yield range for shopping centres is 3.5% to 5.3%. The more robust end of the market - specialists stores (Fachmarktzentren) and grocery-anchored retail parks - are still in favour despite question marks about price adjustments in light of the rise in interest rates.
So, what about some of the riskier strategies to get that 5% and beyond? For investors with a higher appetite for risk, there are a range of non-core properties out there with visible deficits - high vacancies, poor location, unstable letting structures, or big energy-efficiency liabilities. This is where the discrepancy between buyers' and sellers' price expectations is at its highest. A buyer with little intention of undertaking major energy-efficiency refurbishment could be looking at an IRR potential of up to 8.4% here, says the study. But there is a serious risk of the investment underperforming - this one is for the real diehards.
And for those prepared to invest in the D-markets, offices could provide up to 10.8% - with concomitant risk, of course. Production properties, where core assets could return 7.3%, could yield up to 12.3% if they're non-core. Some warehouse properties can yield 7.9% and business parks 10.1%.
The current basket of troubles - the war in Ukraine, energy prices, global supply bottlenecks, a possible new wave of coronavirus, the eurozone interest rate policy - are all putting the German economy under unprecedented stress, conclude the authors. Real estate deals are being cancelled, and entire investment strategies and commitments are being reviewed. The climate crisis is hovering over everything, with social and environmental demands increasing all the time. Uncertainty, indeed.
